Ethenea Independent Investors S.A. expands its Portfolio Management Team by a new colleague. Peter Steffen strengthens the team around Luca Pesarini, Arnoldo Valsangiacomo, Guido Barthels and Daniel Stefanetti as of January 2015. “We are happy to have experienced Portfolio Manager Peter Steffen aboard. The equities expert completes our team and will support us in the investment decisions of our funds”, says Chairman of the Board of Directors and Portfolio Manager Luca Pesarini.
Peter Steffen holds a Master’s Degree in Finance and Asset Management and is CFA Charterholder. He worked for different banks and gained relevant experience in the areas of Credit Research, Equity Research, Corporate Banking and Alternative Asset Management. In 2007 he joined Deutsche Asset & Wealth Management Investment GmbH in Frankfurt and New York. For three years he worked as analyst for US bank and insurance stocks. Since 2010, he occupied the position of Portfolio Manager and successfully managed the funds DWS Global Value and DWS Top Dividende.
Capital Strategies is Ethenea distributor in Spain and Portugal.
Photo: Eneas de Troya. Assessing the U.S. Economy in the New Era of Innovation
There are driving changes in the U.S. economy, affecting employment, productivity and profitability dynamics: the automation of knowledge work, advanced robotics and the energy revolution. These trends are just the tip of the iceberg, says Pioneer Investments. “Over the coming decade, radical changes in healthcare, education, communication, transportation and alternative energy – to name just a few – will transform the economy and the investment landscape. We believe that new modes of research and analysis will be necessary in order to interpret the impact of these changes on both the macro and micro levels of the economy”.
Selection in the Era of Innovation
In this era of accelerating innovation, Pioneer´s analysts believe that a fundamentally different analytical perspective on long-term factors shaping the economic landscape is required. “This framework, together with the more traditional sector/business financial analysis, will potentially enable us to identify unique return opportunities and uncover hidden risks in each market”. Key factors for the firm are:
New technologies’ impacts on sector trends
New business emergence
Rapidly evolving disruptive competitors
Business model flexibility; the ability to leverage a platform, respond to competitive threats, reshape product and service offerings
Demonstrable innovation track record (ability to enter new markets/launch new products)
The ability to attract/retain innovation talent, shed costs, rapidly increase productivity
Accelerating Innovation: Far-reaching, Positive Consequences on the Economy
The U.S. economy is in transition, moving rapidly towards a knowledge-based economy that will rely increasingly less on human labor to manufacture goods and provide many services. “We believe the trends we have discussed will rapidly reshape the economic landscape. With any dramatic change comes uncertainty and some fear. Many pundits have highlighted the possible downside of these changes. While we are sympathetic to these concerns, we believe that accelerating innovation will ultimately create more jobs than it destroys, produce dramatic wealth and have far-reaching positive consequences to areas of the economy that have historically been less productive (education and healthcare are good examples)”, explains Michael Temple, director of Credit Research at Pioneer Investments and portfolio manager for Pioneer Dynamic Credit Fund.
Every economic transition generates dislocations. Society ultimately adapts but the transition will be difficult to navigate for those unable to keep up. This has significant ramifications for the investment landscape, opines Temple. “Investors that use traditional frameworks to analyze the market, picking winners and losers based on outdated valuation relationships or assessing macro-economic policy based on irrelevant historical paradigms, run the risk of focusing on the wrong things”.
Photo: Alastair Mundy, Head of Value at Investec. Investec: “Finally Things Are Changing With Large Companies in UK”
Alastair Mundy, Head of Value at Investec Asset Management, discusses in this interview where he sees the best investment potential in 2015.
What has surprised you most in 2014?
What has really surprised me this year was quite how poor the performance of Tesco’s share price was. We knew trading was tough in the food retail sector and we knew their accounting was pretty aggressive, but even we were surprised when the accounting irregularities hit the screens.
However, we are keeping faith with Tesco, we still think they can turn the business around, and we think they can compete against discount retailers. There is now new management at Tesco, Dave Lewis has come in from Unilever, and we expect him to shake things up very quickly; perhaps sell the Asian or European divisions and/or some non-corporate businesses, and perhaps be more competitive against the discount retailers.
Where do you see good value in the UK equity market in 2015?
The best value we see in the UK equity market going into 2015 is in the larger stocks in the market. Companies like HSBC, Glaxo, BP and Shell have performed poorly against the mid-cap companies over the last decade and we think finally things are changing with these very large companies. Rather than looking for acquisitions they are making disposals, reducing their non-core assets, cutting costs and we believe focusing on what is right for the shareholder.
Why do you believe there is value in mega caps?
We think if mega-cap companies can shrink back to where they really have the strong competitive advantage, shareholders will be surprised at the amount of earnings growth these companies can deliver. They are on quite low valuations already compared to some other smaller companies in the market, so we think that is what is going to drive performance.
How are you positioning your portfolios in terms of strategy and style?
Our UK Special Situations portfolio is positioned increasingly towards the FTSE 100 companies, where we have a very large weighting. We have been reducing our weighting towards FTSE 250 companies over the last couple of years and this has continued in 2014. We also hold quite a lot of cash; not so that we can spend it if there is a small market fall, but to wait for some really fantastic opportunities or for individual stocks if they have profit warnings or fall significantly out of favour.
How are you positioned in your complementary assets on your Cautious Managed portfolio?
We think it is very important to focus our Cautious Managed portfolio on capital preservation at the moment, as we see a number of concerns around the world. These concerns range from geopolitical worries to fairly disappointing earnings growth for companies worldwide, and, of course, the end of quantitative easing in the US. All of these factors suggest that equity valuations should not be as high as they are. So, what do we need if we think equity valuations are going to fall? We need some complementary assets such as gold, gold equities, Norwegian krone, cash and index-linked bonds, both US and UK. We cannot be absolutely positive that these complementary assets will rise if equity markets fall significantly, but we are hoping that they will dampen volatility if equity markets become more volatile. The strategy of investing in out-of-favour companies and combining this with a focus on complementary assets that work well with equities in different times in the cycle has been a strategy that has been successful for us over the past 21 years on our Cautious Managed portfolio.
Photo: John Bennett, Head of European Equities at Henderson. Henderson: "Europe Remains the Global Whipping Boy"
Europe remains the global whipping boy, says John Bennett, Head of European Equities at Henderson. But among european countries, the Henderson team prefers Germany, “where balance sheets are improving and political headwinds are easing”.
What lessons have you learned from 2014?
I have long believed that we live in a world of momentum investing. Investors fail to anticipate inflection points; they like to chase it once the inflection has already happened. This is reflected in the amount of time that people waste from quarter to quarter, focusing on earnings per share (EPS) guidance as an indicator of a company’s prospects. This is a horrible trend that originated in the US. The way to get a competitive advantage, in my view, is to ignore it and focus on what really matters – cash flow. I always look at the cash flow, because cash will always out, as will value.
2014 also provided a reminder of why (with the exception of some of the Nordics), I prefer to ‘rent’ or trade European banks, holding stocks in the sector on a short-term basis. The industry has been a disappointing investment since the mid-1990s and it remains in a structural bear market, subject to short, sharp rallies.
Where do you see the most attractive opportunities within your asset class in 2015?
I think that large caps offer the best prospects in Europe, with investors willing to pay a higher price for quality businesses where they perceive a greater source of safe income. At a sector level, our established and often contrarian commitment to the pharmaceutical sector remains intact, while “smart cars” has been a consistent investment theme for two years now.
Recent months has seen us call off a major bear in telecommunications and utilities, two areas of potential opportunity in 2015. Merger and acquisition (M&A) speculation has fuelled a rally in the European telecommunications sector and we expect further consolidation going forward. The case for utilities is driven by delta – the rate of change we see in the industry. We are focused primarily on Germany, where balance sheets are improving and political headwinds are easing.
What are the biggest risks?
Europe remains the global whipping boy: the economy is in a mess, politicians are dysfunctional (a global problem) and there are fault lines in financial markets. I prefer to focus on the micro, identifying attractive sector and stock-specific opportunities, rather than geopolitical events we cannot influence and which may, or may not, be a factor.
Are you more positive or negative now than you were 12 months ago on the economic and investment outlook, and why?
The bull market is starting to look stretched in Europe and without a step-up in revenue growth leading to earnings growth any rise in equity markets can only come from an expansion of price/earnings (P/E) multiples. M&A activity is likely to remain in focus and may well accelerate. In the near term, investor uncertainty has risen and the market remains schizophrenic, while deflation remains a real and present danger. The European Central Bank is clearly seeking to underpin the eurozone and we saw in 2012 that this can be very supportive. But equities were cheaper back then and the cycle younger.
I think 2015 could see a significant pick-up in volatility, so investors should brace themselves for difficult markets. That is why I think stock picking is so important. By understanding a company’s strengths and weaknesses we can seek to be better positioned than the general market both in good times and bad.
Photo: Peter Eerdmans Co-Head of Emerging Markets Fixed Income . Investec's Peter Eerdmans Sees More Room for Positive EMD Returns this Year
As he reflects on events in 2014 and looks forward to the coming months, Peter Eerdmans, Co-Head of Emerging Market Fixed Income at Investec AM, sees more room for positive EMD returns this year.
How did EMD perform in 2014?
2014 was an eventful year for emerging markets, characterised by geopolitical risk and volatility. 2014 was, however, better than 2013, when there was a lot of negativity about emerging markets. Since then people have started to re-engage with emerging markets. They rallied through the spring and summer, but when the dollar started strengthening the markets ran into resistance again. Nevertheless, emerging market bonds have continued to post positive returns on the year, as many emerging markets have reached a level of economic maturity that allows them to benefit from low global inflation. EM currencies have been more mixed, as some economies require further adjustment to cope with tightening US monetary policy. Also, geopolitics has had a major impact on specific countries, notably the Russia/Ukraine conflict, the Argentinian default, and Iraq/ISIS. These themes have impacted local markets but not global emerging markets as a whole, allowing currency selection between countries to offer some protection to investors.
Should we be concerned about rising interest rates and a stronger dollar in the emerging economies in 2015?
The markets will have to work with rising interest rates from here and with that probably a slightly stronger dollar. We will have to navigate the portfolios through those times. But we do not think that there will be either excessive interest rate rises in the US or excessive dollar strength. The US also has its issues. Trend growth is lower, which means we are unlikely to see a strong US dollar bull market, as in the 1980s and the late 1990s.
The asset class has re-priced: we think emerging markets are a lot cheaper and a lot more is priced in. Emerging markets have implemented reforms and now have flexible exchange rates, their current accounts look better, external debt is lower, and FX reserves are healthier. To re-cap, many key factors in emerging markets are stronger today than in previous crises, so we think emerging markets will perform better in future crises. Of course, there will be times when we have to adjust the portfolio more tactically to protect it, but there will be other times when emerging markets will perform well.
What are the biggest risks to these views?
One of the key risks is monetary policy withdrawal, i.e. less easing and more tightening over the next year or so. But as outlined above, we think that emerging markets are well placed for that. We also think that they will react with more positive reforms. Emerging markets have had an easy decade. Quantitative easing made it very easy, as a lot of money flowed into emerging markets.
Another risk is China. A key question is: Will we see a hard landing that will impact Asian markets and commodity prices further? We think that the Chinese have all the levers to navigate their growth gently slower as they rebalance their economy. Notwithstanding this, we believe there is going to be a moderate slowdown in China, which we think emerging markets will be able to withstand. There will be winners and losers from slower growth in China — countries such as Turkey and India which compete with China for commodity imports will benefit as the price of those commodities fall.
How are you positioning your different strategies?
We run a lot of different strategies. Broadly speaking, we prefer markets that are weighted towards manufacturing. Asia is a region that we like, especially as regards to currencies. We are more cautious about rates. Latin America will be slightly more challenging, in terms of growth, because of the predominance of commodities in that region. Overall, we like bonds better than currencies because our inflation outlook sees moderating inflation and lower inflation should help bonds. We are more neutral on currencies, as although they offer value they are faced with a dollar headwind. We focus on relative plays, on picking the right countries to be overweight and picking the right countries to avoid.
Photo: Valentijn van Nieuwenhuijzen, head of Strategy Multi-Asset at ING IM . Investors Expect Deflation in Europe and QE by the ECB in 2015, ING IM Survey Reveals
According to the latest Risk Rotation survey released by ING Investment Management (ING IM), 64% of institutional investors expect the ECB to introduce quantitative easing (QE) measures this year, almost one third (27%) sees first measures to take place in the third quarter of 2015.
The research, which is based on a survey among 152 institutional investors, also revealed that half of all respondents consider a deflationary Japan-style scenario in the eurozone to be ‘moderately likely’, while 13% see it as very likely. Only 23% of investors believe that the eurozone will not enter deflation.
Valentijn van Nieuwenhuijzen, head of Strategy Multi-Asset at ING IM says: It is clear that there are very real concerns of a prolonged period of deflation which could – if investors are correct – twist Draghi’s arm when it comes to implementing a Sovereign QE programme in early 2015.
Other than a potential Eurozone crisis, investors cited interest rate rises (50%), Chinese hard landing (47%) and a fiscal shock (37%) as the most significant risks posed to investment portfolios.
With regard to asset allocation, 40% of institutional investors surveyed say they have maintained their positions in terms of risk over the past six months. European investors appear to be the most bullish when it comes to risk, with 32% having increased their appetite in recent months, compared to 29% for all investors.
Wikimedia CommonsIan Warmerdam, Manager of the Henderson Global Growth Fund and the Henderson Gartmore Global Growth Fund. Henderson: “There Are New Themes Emerging with The Potential to Become A Fruitful Source of Long-Term Growth Ideas”
Ian Warmerdam, Manager of the Henderson Global Growth Fund and the Henderson Gartmore Global Growth Fund, shares his outlook for 2015.
What lessons have you learned from 2014?
Market sentiment can turn very quickly and it is vital to possess strong conviction in your investment ideas. Strong conviction can only be attained via a thorough understanding of the risks and opportunities associated with each individual investment in the portfolio. In this respect, our two-stage process of fundamental analysis is key to gaining this comfort with the underlying thesis. During 2014, indiscriminate market ‘sell-offs’, not uncommon five years into a market recovery, provided both attractive entry points for new stocks and also the chance to add to our existing holdings with highest conviction.
Where do you see the most attractive opportunities within your asset class in 2015?
As we look to 2015, we continue to see compelling investment opportunities within our five existing themes, namely; Health Care Innovation, Internet Disruption, Paperless Payment, Energy Efficiency and Global Brands. We are also seeing some new themes emerging with the potential to become a fruitful source of long-term secular growth ideas, one of which is Factory Automation.
What are the biggest risks?
One of the biggest risks for the global growth strategy would be a period of sustained underperformance for the US stock market versus the wider universe. The fund’s overweight position in this market is almost solely a function of where we see the most undervalued areas of secular growth at this particular point in time.
Are you more positive or negative now than you were 12 months ago on the economic and investment outlook, and why?
We claim no ability to predict the short-term direction of the markets. However, through positioning our fund towards securities that we believe are undervalued and that are exposed to strong secular tailwinds of growth, we remain confident in our ability to generate strong absolute and relative returns over the long term.
. Are Valuation Divergences in Equities Justified?
As always, the question for equity investors is whether the risk/reward trade off is compelling enough.
Beginning 2015, investors have been ascribing an ever wider price-to- earnings multiple for developed markets relative to emerging markets. This divergence made sense as the United States, in particular, has delivered earnings growth and improving returns on equity (ROE), whereas emerging markets have not, explains a recent research by MFS.
Developed market valuations
Only in the US equity market has the forward P/E been trending higher, said the firm, reinforcing the importance of continued US corporate earnings and sales growth. Apprehensive that US margins might be stretched, investors are worried whether the momentum can continue. Yet with wages rising slower than revenues, energy prices falling and interest rates remaining low, we are not as concerned. Nevertheless the prospect of Fed rate hikes in 2015 has the potential to cap further upside in P/E multiple expansion, suggest the team of MFS. Historically, market indices have tended to peak no sooner than four months before the first rate increase and edge lower after a series of rate hikes, so there is precedent for caution.
Presuming forecast earnings can be delivered, many other DM regions look relatively inexpensive on valuation. In both Japan and Europe, the report card for 2014 will likely show that unprecedented policy support is simply not transmitting into growth in the broader economy. While Prime Minister Abe’s “three arrows” and ECB President Draghi’s pledge to do “whatever it takes” were initially well received by markets and generally regarded as defining moments for policy, both economies showed minimal evidence of cooperation with their central bankers.
Japan takes action again
In what was arguably one of November’s biggest macro developments, Japan’s policymakers surprised the markets by announcing a fresh round of stimulus. A few weeks later, data confirmed that the economy slipped into recession in the second quarter, prompting Abe to call an early election to reaffirm his support. Such action could be positive for the Japanese equity market in the short term but may be unsustainable without real structural change to drive durable ROE improvements. While corporate profitability may pick up next year thanks to the weakening yen, our long-term time horizon makes us cautious.
Similarly, the reform and growth picture in Europe is not much brighter, which is why the ECB may eventually be forced to resort to aggressive quantitative easing along the lines of the Fed and Bank of Japan programs. Over the course of next year, however, we do expect financial conditions to ease, with less fiscal drag and a weaker euro also helping to provide some support for eurozone earnings.
China and emerging markets
Not to be outdone on stimulus, the PBOC also announced an unexpected policy easing, which was widely interpreted to provide some near-term stability and limit the danger of a hard landing for China’s economy. This surprise move was yet another example of a central bank’s willingness to do more to minimize downside risk.
Even though MFS recognizes the flaws of considering EM countries homogenous, they generally face a subdued growth outlook. Just a few years ago the bullish EM story seemed so compelling, but now the common denominator across these economies is the difficulty in transitioning from fixed-asset investment to consumption-led growth. Sectors exposed to the theme of a rising middle class — for example, consumer staples and health care — are quite expensive relative to their DM counterparts, creating a dilemma for investors in EM equities, remarks MFS.
Focus on fundamentals
Equity markets are clearly at an inflection point. Outside the US market, which has regained its footing, other regions are still suffering from low consumer confidence, limited capital spending and deflationary pressures, leading to negative earnings revisions and equity market underperformance. Japan has been the only exception, primarily because of the weak yen.
Environments like these are often characterized by far greater stock price volatility than the changes in underlying earnings and dividends warrant. Without a doubt, the global economy remains weak — but it is not deteriorating. With central bankers still willing to provide support until job creation broadens and growth becomes self-sustaining, we believe the case for equities remains reasonable even though valuation support is weaker. We repeat our mantra that there are still opportunities among higher-quality companies with strong balance sheets and earnings visibility, concludes MFS.
A decade ago when I was on a flight from Tokyo to Beijing, I noticed Chinese tourists lugging home Japanese rice cookers. Four years ago, I encountered groups of Chinese tourists enjoying themselves at hot springs outside of Tokyo. Last month in Ginza, a Chinese-speaking salesperson didn’t miss the opportunity to remind me to pay with China’s UnionPay, a popular payment card, to purchase duty free items while busy helping to wrap gifts for tourists. As a testament to my own experience, from the start of this year until August, Chinese tourists to Japan were up by 84% from last year, according to the Japan National Tourism Organization.
This is an exciting trend for Japan’s large and small retailers, hotels and airline companies, and was a particularly welcome buffer after Japan’s April tax hike led to a domestic consumption decline earlier this year. Media reports note tourism revenues are expected to help make up the shortfall stemming from Japan’s shrinking population. According to Japan’s Ministry of Internal Affairs and Communications, each Japanese citizen spent approximately US$10,800 (1.23 million yen) while every tourist to Japan spent about US$1,200 (137,000 yen) per trip in 2013.This means every nine tourists combined consumed as much as one Japanese in 2013. If this still holds true in 2020 when the country hopes to attract 20 million tourists, it will translate into roughly US$23.5 billion (2.7 trillion yen) or the equivalent consumption of 2.2 million residents. (Japan’s GDP in 2013 was US$4.90 trillion and just over 10 million foreign tourists visited that year.)
Before we ask whether the goal of attracting 20 million tourists is even achievable, I cannot help but wonder why tourists are so attracted to Japan. One factor that has helped boost tourism is the easing of travel visa requirements. Rising disposable incomes have also been a factor.
Also, some products in Japan tend to be cheaper than in other countries that may have higher taxes and quality of service is famously high. In fact, many people visiting Japan from elsewhere in the region have been quite surprised to find such things as sales staff willing to kneel down on the floor while helping shoe shoppers. Japan’s “elevator ladies” who bow as patrons exit or enter may also be surprising. Even gas station attendants will stop traffic in the street to do traffic control for customers.
This is all quite promising for tourism, but is Japan’s increase in visitors—especially Chinese tourists—truly sustainable? In the 1990s, there was a boom in China as visitors flocked to what was nicknamed, “Xin Ma Tai” for Singapore, Malaysia and Thailand. Back then, many Chinese were able to afford overseas travel only for the first time. Today, “Xin Ma Tai” is just one of the many options available, and these overseas destinations are sometimes even cheaper than domestic travel. In July, 342,600 Chinese tourists visited Thailand, 25% less than the same month last year. Meanwhile 281,200 Chinese visited Japan, 101% increase over last year. This year, South Korea beat both Thailand and Japan, becoming a more popular destination for Chinese tourists than either of those countries. The good news is that Asia’s tourism market is growing fast, but the bigger challenge is whether Japan can hold on to the current momentum until 2020.
Opinion column by Jia Zhu, 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.
Photo: John Stratford. New Year's Resolutions: The Four Ps
“If you’re like many of the people I meet, you just made a New Year’s resolution. And your resolution was most likely about something you want to do more of, less of, or differently. Now, if your resolution has to do with your body, I encourage you to share it — right away — with a friend or mentor, to increase the odds that you will act on it and succeed”, explains Vicky Schroebel, Director of Business Development at MFS.
However, if the resolution is a financial one (spend less, save more, etc.), Schroebel recommends to work with the financial advisor. “There are many financial New Year’s resolutions that I hope you might make over time, but let’s start with the most important one”.
Take control of the four Ps for a successful financial future:
Progress: At least annually it is necessary to review the progress towards retirement savings (or retirement income) goal. This means define or confirm the goal(s).
Protect: “At least annually I will ask my advisor to review what we are doing to protect against the greatest risks to my retirement income, which include taxes and inflation, among other risks”, says the MFS´expert.
Plan: Review annually the plan for the year, focusing on how maximize what you are setting aside for your future needs.
Portfolio changes: It is key make changes to the portfolio/plan based on the above three resolutions, rather than emotionally responding to short-term market swings.
“Take control of your resolutions by seeking support!”, concludes.
