Photo: Lucy B.. A Positive Outlook for Equities Despite EU’s Growth Gloom
Yet while the macro backdrop remains pretty cloudy –with significant squalls forecast from the election in Greece, difficulties in Spain and the early summer UK election– not all is actually that bleak in Europe, explained Neil Dwane, CIO of Equity Europe at Alliance GI in his last “Perspective on Europe”.
Equities remain attractively valued and offer a significant yield pickup against the financially repressed bond and credit markets, said Dwane. “Corporates are now actively engaging in industry restructurings, where, in general, Europe is at least 10 years behind the US. A weakening euro will boost European earnings in 2015, turning a five-year headwind into a tailwind at last and allowing European earnings to grow faster than US earnings for the first time since the start of the global financial crisis”.
With little correlation between economic growth and corporate profits, European companies are busily restructuring and refocussing, which is underpinning returns to shareholders and creating a good base for future profitability, argued the expert of Allianz GI. “A weak oil price is also good for Europe, releasing approximately 1 per cent of GDP to be redeployed into consumption and investment. The EU infrastructure plan may also be the first of a series of fiscal plans to truly boost demand in the coming years”, he continued.
“In Europe, investors now truly have to take more risk to obtain a return, as nearly all sovereign bonds and over half of the investment-grade credit markets yield less than 1 per cent – yet this allocation to fixed income represents approximately 80 per cent for many investors! A regional rebalancing for European investors in search of a reasonable return should see a rotation from bonds into equities in 2015”, added Dwane.
Photo: Gabriel Jorby. Chinese Stars Shine Bright Through Macro Clouds
Investors who obsess and fret about China’s slower headline gross domestic product (GDP) growth may be missing valuable individual equityinvestments. China is growing at a more measured pace than in the past and in 2015, China will continue to balance the competing needs of growth, reform and deleveraging. As such, official GDP growth targets may need to be revised down. However, a myopic vision that correlates GDP growth to investment returns overlooks the bright prospects for many companies, particularly those that are genuinely innovative, globally competitive, and those companies experiencing multi-year improvements in demand dynamics driven by demographics.
Bright stars
Many Chinese companies have a proven track record of delivering profit and cash-flow growth irrespective of the Chinese economy. The technology sector, particularly internet and software, is one of the few industries in China where research and development (R&D) is a priority. R&D has already led to growing profits, as companies develop products that increase user loyalty, generate incremental revenue and create valuable user bases that attract online advertising expenditure.
Tencent and Alibaba are arguably more innovative than Amazon, Facebook and Twitter as a result of their onnovative applications, huge user communities and early development of payment facilities. Tencent was founded in 1998 and now has more than 815 million monthly active instant messaging accounts. In 2013 it spent CNY 5.1bn on R&D (£0.5bn), which was 8.4 per cent of sales.
Recent IPO Alibaba was founded in 1999 and is now the world’s largest ecommerce company by revenues, in the financial year ending March 2014.
Companies in China’s technology sector are experiencing significant growth. The market capitalisations of internet firms Tencent and Alibaba now rank alongside some of the largest companies in China.
Another bright technology star is Lenovo, a Chinese PC company that through stable and strong management, international acquisitions, and the development of a global manufacturing footprint has become a recognisable global brand. It has been the world’s largest PC vendor for over a year, with a current market share of 19 per cent.
Demographic drivers
The Communist Party controls China but one thing it cannot control is demographic change, where past decisions can lead to future trends. China has had a one child policy since 1979 and consequently China’s population is rapidly ageing just as it is getting richer. This is triggering a multi-year boom in demand for healthcare drugs, therapies and services. China has probably underspent on healthcare, and with greater life expectancy and insurance provision we expect supportive industry tailwinds to benefit domestic healthcare companies such as CSPC Pharma and China Medical Systems.
So do not be frozen in the headlights of China’s macroeconomic slowdown, instead appreciate how far some Chinese companies have come and how the outlook varies dramatically on the ground.
Opinion column by Charlie Awdry, Chinese Equities Portfolio Manager at Henderson Global Investors.
. Funds Society celebra su fiesta de verano con la participación de 300 profesionales de la industria
A few days ago, Funds Society held a party in Miami to celebrate its second anniversary and the launch of its new print magazine, a quarterly publication for offshore industry professionals in the United States.
Funds Society celebrated in style the closure of an excellent year 2014, in which the website received 300,000 visits and over 500,000 page views, which translates into a growth of 56% and 81% respectively compared to 2013. The number of unique visitors is also worth noting, as these have more than doubled in the past year, a clear indication of Funds Society’s strong growth during the last two years since its founding.
At the anniversary party, held at Perfecto Gastrobar on Brickell Avenue in the financial heart of Miami, Funds Society was well supported by over 130 professionals from the wealth and asset management industry. To the delight of those present, the evening was enlivened with performances by a group of actors from Angelica Torres’ Broadway Musical Theatre Company.
Not only were the achievements to date celebrated, but also all of Funds Society’s projects for this year 2015, which is just beginning and for which it already has the support of twenty top-level international firms.
The Funds Society 2nd Golf Tournament, which will be sponsored this time by Henderson, MFS, M&G and Carmignac, will be held in March. On this occasion, the tournament will be held in Miami Beach on March 13th.
The Golf championship will be followed in May by Funds Society’s First Fund Selector Summit, an event which Funds Society will hold in Miami in association with the British company Open Door Media Partners, and to which 48 key fund selectors will be invited, who will get to know, firsthand, the most relevant strategies of some of the main asset managers in the industry.
Finally, also point out that the new Funds Society print magazine, whose first issue has come to light this January, debuted during the web’s second anniversary. The publication, which was launched with major backing from sponsors, was created with the aim of becoming a showcase for wealth and asset management companies on both sides of the Atlantic, and with the firm intention of becoming a reference amongst industry professionals.
Luis Moreno, Senior Executive Vice-President, will be responsible for Private Banking . Santander Integrates the Private Banking, Asset Management and Insurance Division in its Retail and Commercial Banking Division
Banco Santander’s board of directors has approved changes that simplify its corporate structure, reducing the number of divisions from 15 to 11, while further enhancing risk management. These changes will contribute to improve the bank’s ability to respond to customers’ needs and to accomplish the ambitious financial and business targets it has set.
The Private Banking, Asset Management and Insurance Division will be integrated in the Retail and Commercial Banking Division headed by Javier San Félix, Senior Executive Vice-President. Luis Moreno, Senior Executive Vice-President, will be responsible for Private Banking reporting to the head of the division.
Once the restructure of the property assets in Spain is completed, the Recoveries division under Remigio Iglesias, Senior Executive Vice-President, will be integrated as a corporate area under the Risk division directed by José María Nus, Senior Executive Vice-President in charge of risk, who reports directly to Matías Rodriguez Inciarte, Group Vice-Chairman and Chairman of the Board’s Risks Committee.
Banco Santander’s CEO, José Antonio Álvarez, said: “The changes approved today complement the restructuring that started in September with the new Executive Chairman. They will enable us to capture further growth opportunities which require the more agile, flexible and decentralized organization we are now implementing. We want Santander to be the best place to work, the best bank for our customers, with growing and sustainable profitability for shareholders, while contributing to the progress of the societies where we work.”
The other appointments, which are subject to the pertinent regulatory authorizations, are:
Rodrigo Echenique, Vice-Chairman of the Board of Directors, will also be Executive Director, to whom following regulators’ recommendations regarding corporate governance, the Compliance function will report, alongside other duties delegated to him by the Group’s Executive Chairman.
José María Fuster, Senior Executive Vice-President and until now head of the Technology and Operations division, will become the corporate Director of Innovation reporting directly to the Group’s Executive Chairman. Mr. Fuster will lead new strategies to position the Bank as an international reference in innovation and technology applied to banking.
Andreu Plaza has been appointed Senior Executive Vice-President and head of Technology and Operations. Mr. Plaza, with extensive experience in banking technology, has contributed decisively to the technological transformation of Santander U.K. s Corporate and Commercial Banking. The new structure separates the functions for defining digital strategies (innovation) from implementation, execution and development (technology and operations).
Rami Aboukhair, until now Executive Vice-President, has been appointed Senior Executive Vice-President. Mr. Aboukhair, who has extensive knowledge of retail banking, will join Santander Spain as head of Retail, Commercial and Corporate Banking. He will report to Enrique García Candelas, the country head of Spain who also oversees Global Banking and Markets, risk, management and organization, costs and the rest of the support areas in Spain.
An Area of Supervisory and Regulatory Relations is created within the Finance Division. It will be in charge of global management and coordination with the bank’s supervisors and regulators, as well as the Group’s units and entities. In particular, the new area will manage, as a supervised institution, the relationship with the European Central Bank, the Group’s consolidated supervisor. José Manuel Campa, until now head of Investor Relations, will take up this responsibility, reporting to Jose García Cantera, Senior Executive Vice-President and head of the Financial Division.
With a goal to strengthen Santander’s positioning in universities, Santander Universities, which is a corporate area headed by José Antonio Villasante, Senior Executive Vice-President, will continue to report, as a corporate area, to the Group’s executive chairman and will also report functionally to the Retail and Commercial Banking Division for the commercial relationships with Universities and higher- education institutions.
Víctor Matarranz, Senior Executive Vice-President and Head of the Executive Chairman’s Office, will also take responsibility for Strategy. The new area will be called Chairman’s Office and Strategy.
José Luis de Mora, Executive Vice-President, has been appointed Senior Executive Vice-President and will continue to head the Financial Planning and Corporate Development area, reporting directly to the CEO and functionally to the Chairman’s Office and Strategy area.
Photo: Ahron de Leeuw. The Emerging Consumer: It’s all About the Rise of the Emerging Middle Class
The nineteenth century industrial revolution created a substantial Western European and American middle class. Today the same is happening in emerging markets. Over the next two decades, the global middle class is expected to expand by another three billion, from 1.8 billion to 4.9 billion, coming almost exclusively from the emerging world. In Asia alone, 575 million people can already count themselves among the middle class — more than the European Union’s total population, explain Jack Neele and Richard Speetjens, managers of the Robeco Global Consumer Trends Equities strategy.
This crossover from West to East in terms of size and spending of the middle class has large implications for expected consumption growth:
Adapt to shifting local demands
The aging population in China will need new financial services to help them save for retirement. In addition, the pressure from urbanization will lead to growing demand for green technologies. The transformation is most dramatic in China, but there will be shifts across many developing economies. What these households want may be very different from the consumer demands seen in previous periods of rapid economic development. Businesses will need to tailor the products they offer to shifting local demands.
More money to spend
Over the past decades, developed economies have dominated sales of durable consumer goods. Penetration is still relatively low in many rapid-growth economies. Once household incomes approach USD 10,000, however, demand for durable consumer goods picks up. As more households in these economies move into higher income bands, they will have more money to spend on discretionary items. Demand for services such as communications, culture and recreation will grow at almost twice the rate of food spending.
Strong local positions or strong Western brands
However, this higher growth in consumer spending in emerging markets has not been an easy win for consumer companies. Many local companies prioritized sales growth, but intense competition, value-focused consumers and rising costs are making it difficult to boost the bottom line. Amid rising volatility, companies must be more careful and strategic in how they approach these markets. This is the reason why within our emerging consumer trend we focus on companies with very strong local market positions or strong Western brands.
Photo: Sten Dueland. Oil: Pulled Apart or Pushed Ahead?
At the beginning of 2015, the worry machines of the world are working full time. We hear that China is a bubble, Japan cannot be fixed, Europe is a mess again and the United States is showing signs of slowing.
There may be some truth in all this, but there are other truths that we should also consider.
The drop in oil prices is basically good for 70% of the world’s economies
The biggest economic regions, mentioned above, are all net importers of energy, and now that the price of crude oil has been roughly cut in half, their costs of doing business will also fall. Further, a drop in commodity prices tends to spur overall spending. Historically, going back over 50 years, a 20% decline in oil prices has signaled a 0.5% – 1% rise in the rate of real global GDP growth during the subsequent 12 months. The current drop in oil is about twice that.
The world’s currencies have been going through a dramatic readjustment
Many local-country currencies that were once the darlings of international investors have fallen, while the value of the US dollar has risen. For US consumers, the world’s biggest block of final demand, a stronger US dollar boosts buying power and creates demand for cheaper imported goods, from cars to smartphones. Exporting countries — such as Germany, Japan, China and others in Asia and South America — can sell more manufactured goods in the world market.
The US expansion has not been purchased at the expense of future growth
Though this business cycle — now in its sixth year — has been characterized by low interest rates, no one is rushing to borrow. During the three previous business cycles, US consumers and businesses took on more debt as the US Federal Reserve lowered rates to kick-start economic activity. This time, however, the increase in US private borrowing has been more than offset by even bigger increases in the value of the underlying assets — as well as gains in the income and cash flows that support the repayment of that debt. In other words, the risk to this cycle of higher rates coming from the Fed or the market is not as dramatic as in previous cycles.
The theme of the world consumer may be revived
Admittedly, global growth has been sluggish, but the world population has continued to expand. Household formation, along with its related spending, was deferred during the slowdown. I think the demand for goods driven by growing populations — especially in developing countries — is likely to re-emerge. Thanks to currency moves and lower energy prices, many goods are now cheaper, while world wages are generally rising. The emergence of the global consumer, a popular investing theme a few years ago, has been given an added boost.
On the whole, the mix of data does not suggest any kind of runaway boom in 2015, but at the same time, a global recession seems a long way off. Arguably, the world banking system has been largely repaired since the damage in 2009. For those investors scarred by the drops in global security markets six years ago who have been reluctant to return, it may be worthwhile to reconsider that the realignment of currencies and energy prices could be a long-term positive impulse to world growth.
So in 2015, let’s be grateful for organic, slow and steady growth, not leveraged boom-like growth. Let’s hear a cheer for lower, not higher, energy prices. And let’s bear in mind that when low interest rates rise someday, it will be a sign that normalcy is coming back, not that disaster is looming.
Opinion column by James Swanson, Chief Investment Strategist, MFS
Photo: Moni Sternbach, European Long Short team at Man Group.. Man GLG Appoints Moni Sternbach to European Long Short Team
Man Group has announced the appointment of Moni Sternbach to its European Long Short team.
Sternbach, who joins from hedge fund business Cheyne Capital, will manage a new strategy which GLGplans to launch in Q1 2015.
Sternbach, a mid-cap specialist, joins Man GLG after almost three years as lead manager of the Cheyne European Mid Cap Long/Short strategies.
Prior to Cheyne, Sternbach was head of European smaller companies at Gartmore Investment Management, where he worked from 2002 to 2011. He has also worked at Bank of America and Deloitte & Touche and graduated from Cambridge University with an MA in Economics. He is a CFA charterholder and a qualified accountant (ACA).
Sternbach will report to Man GLG’s co-CEOs Teun Johnston and Mark Jones.
Teun Johnston said: “Moni is an experienced European fund manager with an excellent track record and he will further enhance our capabilities in the European Long Short space. His mid-cap expertise will form the basis of a new strategy which we will announce in due course and it is with great pleasure we welcome him to Man GLG.”
Moni Sternbach said: “Man GLG has a clear advantage in delivering investment returns and creating value for clients. Its leading edge infrastructure, corporate access and distribution are differentiators in an increasingly complex environment and I am hugely excited to be joining its exceptionally strong team of analysts, portfolio managers, strategists and traders.”
Photo: Fabio Rodrigues Pozzebom/ABr. Moody's Alerts About a Substantial Increase of Default Risk for Venezuela
Moody’s Investors Service has downgraded Venezuela’s government bond ratings to Caa3 from Caa1 and changed the outlook to stable from negative.
The key drivers of the rating actions are the following: Default risk has increased substantially as external finances continue to deteriorate due to a strong decline in oil prices; In the event of a default, Moody’s believes that the loss given default (LGD) is likely to be greater than 50%.
The stable outlook is based on Moody’s view that even if the oil price drops further, expected losses to bondholders are likely to be consistent with a Caa3 rating and unlikely to reach levels associated with lower ratings. The sovereign’s senior unsecured and senior secured ratings have also been downgraded to Caa3 from Caa1, as well as the senior unsecured medium term note program and the senior unsecured program to (P)Caa3 from (P)Caa1.
Venezuela’s long-term local-currency country risk ceilings were also adjusted to Caa2 from Caa1, the foreign currency bond ceiling to Caa3 from Caa1, and the foreign-currency bank deposit ceilings to Ca from Caa2. The short-term foreign currency bond and deposit ceilings remain at NP. These ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.
Lower oil prices
The principal driver of Moody’s decision to downgrade Venezuela’s sovereign rating is a marked increase in default risk owing to lower oil prices. The recent oil price shock has exerted pressure on Venezuela’s balance of payments and dwindling foreign reserves. The price of Venezuela’s oil basket, which is typically priced at a modest discount to the price of Brent, fell to an average of $54.03 per barrel in December 2014 from an average of $88.42 per barrel in 2014. As a result, Moody’s forecasts that Venezuela’s current account balance is likely to shift to a deficit of approximately 2% of GDP in 2015 from an estimated surplus of over 2% of GDP in 2014, the first such yearly deficit since 1998. The dramatic oil price drop, which we expect will be sustained, will negatively affect the balance of payments and will more than outweigh the potential benefits of future foreign investment inflows.
Moody’s believes that the key source of vulnerability for the sovereign’s credit profile is the external accounts. Given a heavy dependence on imports, external finances remain very rigid, decreasing the possibility of import adjustment to prevent a balance of payments crisis. Foreign currency outflows in Venezuela are likely to decrease only marginally in the event of policy measures to further curb import demand and capital account outflows. Although Moody’s believes the sovereign is highly likely to honor the upcoming €1 billion Eurobond maturing in March 2015, given the large mismatch between inflows and outflows, the probability of a debt default occurring in the next 1-2 years has risen from an already high level.
The second driver of the rating action is Moody’s assessment that in the event of a default, bondholder losses are likely to exceed 50% on the sovereign’s external debt instruments. Moody’s believes that balance of payments outflows are likely to exceed inflows by a significant margin at least through 2016, leading to a significant external funding gap that would suggest material debt reduction would be required to ensure balance of payments sustainability.
Moody’s believes that the authorities are unlikely to implement forceful policy measures to curb macroeconomic distortions and imbalances in the near term. Even if implemented, measures that target (1) further administrative controls to curb imports, (2) adjustments to the multiple exchange rate regimes, or (3) raising domestic oil prices to lower consumption and marginally increase exports, are unlikely to materially alter the current conditions that heighten the probability of default.
Despite the potential for increased external bilateral financing, Moody’s estimates that even under a best-case scenario the external funding gap would not be fully covered. Moreover, Moody’s believes that the current stock of foreign currency assets, including official reserves of $22 billion at the end of December 2014, would be insufficient to cover the country’s external financing gap.
In addition to the rising risk of a balance of payments crisis, Venezuela is in the midst of an economic recession and has a highly discretionary policy framework that reflects weak institutions. These challenges more than offset its credit strengths that include low albeit rising government debt and high income levels relative to emerging market and Latin American countries.
What could move the rating up/down
The rating would face upward pressure if balance of payments prospects improve significantly given a strong recovery in oil prices or if a sufficiently large increase of financing flows ensures stabilization of external accounts, says Moody’s. Conversely, the rating would face further downward pressure if external finances weaken in the absence of a recovery in oil prices, increasing the risk of greater losses to bondholders.
The mee. Authorities and Academics Reflect about the Challenges of The Emerging World Order at the II CAF-LSE Conference
With the purpose of promoting the analysis regarding the current dynamics of emerging countries and their impact on the configuration of a new world order, on January 16th, 2015, CAF, Development of Latin America, and the London School of Economics and Political Science (LSE) will hold the II CAF-LSE Conference “Geopolitics and the Global South: Challenges of the emerging world order”.
This year’s program will address in detail the analysis of the current reconfigurations of the world order from the perspective of the emergence of the Global South, and particularly its effects on multilateralism, safety, development, and South-South cooperation. The inaugural session will be in charge of Enrique Garcia, CAF’s Executive President, Stuart Corbridge, LSE’s Deputy Director, and Chris Alden, Director of the LSE’s Global South Unit.
Speakers will include Ricardo Lagos, former President of Chile, and Jose Maria Aznar, former President of the Government of Spain.
The meeting will be held at the headquarters of the London School of Economics and Political Science, and will be transmitted live through livestreaming. It may also by followed in the social networks with the hashtag #CAFLSE.
The II CAF-LSE Conference, organized by CAF, Development Bank of Latin America, and the London School of Economics and Political Science (LSE), is carried out in the framework of the strategic alliance established between the two institutions in 2013 to examine the changing role of emerging countries of the South, especially Latin American countries, in the configuration of the dynamic international scenario.
Photo: Nestor Galina. 7 Prices for 7 Commodities by Loomis, Sayles & Company
The commodity complex has seen a rapid fall since the middle of the 2014 due to global growth concerns, the US dollar rally and continuing overall growth in supply. “I believe prices may be close to bottoming and we could see a cyclical upturn in the first half of 2015”, says Saurabh Lele, Commodities Analyst for the macro strategies group at Loomis, Sayles & Company.
Crude oil
Lele expects crude oil prices to correct in 2015, bringing the Brent Crude Index to $85-95/barrel and the West Texas Intermediate (WTI) to $75-85/barrel by year end. “My opinion is that the current move in crude oil prices is unwarranted. I believe the market is mispricing geopolitical risk, a US supply response and the upcoming global refinery turnaround schedule (periods of refinery closure for maintenance and renewal services)”.
The situation in Libya is still volatile and recent disruptions to oil production are yet to have any impact on prices. Refinery demand in the second half of 2014 was the weakest in five years, not only due to global growth but also due to temporary factors such as closures and maintenance related shutdowns, explains. “The first half of 2015 will see very little maintenance related shutdowns as well as several new refineries initiating operations. Finally, US domestic production will adjust lower as energy and petroleum companies will have less cash to spend in 2015”.
Natural gas
In this case, the analyst expects prices to continue to trade in the $3.75 to $4.25 per mmbtu range (this is the price required for electric consumption to balance the market)
Natural gas seems to have found a comfortable trading range between $3.75 and $4.25 per mmbtu as electric utilities switch between natural gas and coal. Inventories, which were down significantly after the severe winter in early 2014, have built up steadily over the course of a cooler-than-usual summer. “In 2015 we are likely to see higher demand for natural gas due to higher industrial consumption, exports to Mexico and the start of LNG exports from the new Sabine Pass terminal in Texas”, argues.
Copper
Loomis, Sayles & Company expects copper to stay in a slight surplus after which supply growth is expected to slow and fall behind demand.
Inventories at the exchange and bonded warehouses are low and a slight pickup in demand could result in prices moving higher. “Over the next two quarters, we could see demand improve from higher grid spending in China, which has lagged its budgeted number year-to-date”, says Lele.
Iron ore
“Prices could correct and move up to the $80-90 per metric tonne range by the second half of 2015. Longer-term I believe iron ore prices to remain in $80-$90 range”, affirms Lele.
“The fall in prices exceeds what fundamentals would dictate – I believe the decline is being driven by de-stocking/restocking cycles. Demand should improve after the APEC (Asia-Pacific Economic Cooperation) summit in November as steel makers restart mills near Beijing”. Ore inventories at ports have fallen between 7-10% since their June highs, indicating low but stable demand. Iron ore inventories at steel mills are also close to their 2012 lows.
Thermal coal
He expects global thermal coal prices to stay in the $70-75 per metric tonne range over the next year due to weak demand is likely to persist with the only bright spot being medium-term Indian coal. “I see strong supply growth from Indonesia and Australia in the near-term; the impact of the thermal coal import tax is expected to be minimal as Indonesia and Australia are exempt due to their respective free-trade agreements with China”.
Gold
The firm expects gold prices to fall to $1,000/oz over the next two years. “Resilient mine supply and lower demand from China and India should push prices lower. I expect the Indian gold export tax to continue until the end of 2015 as well as Chinese demand for jewelry to remain subdued as anti-corruption sentiment reduces the demand for luxury goods. ETF selling is expected to continue as real rates move higher and inflation/deflation present no major concerns at this time”, enunciates.
